Finance
The global financial crisis has revealed the need to rethink fundamentally how financial systems are regulated. It has also made clear a systemic failure of the economics profession.
Over the past three decades, most economists have developed and come to rely on models that disregard key factors—including the heterogeneity of decision rules, revisions of forecasting strategies, and changes in the social context—that drive outcomes in asset and other markets. It is obvious, even to the casual observer, that these models fail to account for the actual evolution of the real-world economy.
Moreover, the current academic agenda has largely crowded out research on the inherent causes of financial crises. There has also been little exploration of early indicators of systemic crisis and potential ways to prevent this malady from developing. In fact, if one browses through the academic macroeconomics and finance literature,
“systemic crisis” seems to be an otherworldly event, absent from economic models. Most models, by design, offer no immediate handle on how to think about or deal with this recurring phenomenon.
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In our hour of greatest need, societies around the world are left to grope in the dark without a theory. That, to us, is a systemic failure of the economics profession
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Economists’ Failure to Anticipate and Understand the Crisis
The implicit view behind standard equilibrium models is that markets and economies are inherently stable and that they only temporarily get off track. The majority of economists thus failed to warn about the threatening systemic crisis and ignored the work of those who did.
Ironically, as the crisis has unfolded, economists have had no choice but to abandon their standard models and to produce hand-waving common-sense remedies. Common-sense advice, although useful, is a poor substitute for an underlying model. It is not enough to put the existing model to one side, observing that one needs “exceptional
Over the past three decades, most economists have developed and come to rely on models that disregard key factors—including the heterogeneity of decision rules, revisions of forecasting strategies, and changes in the social context—that drive outcomes in asset and other markets. It is obvious, even to the casual observer, that these models fail to account for the actual evolution of the real-world economy.
Moreover, the current academic agenda has largely crowded out research on the inherent causes of financial crises. There has also been little exploration of early indicators of systemic crisis and potential ways to prevent this malady from developing. In fact, if one browses through the academic macroeconomics and finance literature,
“systemic crisis” seems to be an otherworldly event, absent from economic models. Most models, by design, offer no immediate handle on how to think about or deal with this recurring phenomenon.
1
In our hour of greatest need, societies around the world are left to grope in the dark without a theory. That, to us, is a systemic failure of the economics profession
.
Economists’ Failure to Anticipate and Understand the Crisis
The implicit view behind standard equilibrium models is that markets and economies are inherently stable and that they only temporarily get off track. The majority of economists thus failed to warn about the threatening systemic crisis and ignored the work of those who did.
Ironically, as the crisis has unfolded, economists have had no choice but to abandon their standard models and to produce hand-waving common-sense remedies. Common-sense advice, although useful, is a poor substitute for an underlying model. It is not enough to put the existing model to one side, observing that one needs “exceptional